SUMMARY OF QUESTIONS BY OBJECTIVES AND...

CHAPTER 6

COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT

True-False Statements1. 1 K 7. 3 K 13. 4 C 19. 5 C a25. 7 C2. 1 K 8. 3 AP 14. 4 C 20. 5 K a26. 7 K3. 2 K 9. 3 AP 15. 4 K a21. 6 K a27. 7 K4. 2 K 10. 3 K 16. 5 K a22. 6 K a28. 8 K5. 3 K 11. 3 K 17. 5 K a23. 6 K a29. 8 K6. 3 K 12. 4 K 18. 5 K a24. 7 AP a30. 8 K

Multiple Choice Questions31. 1 K 50. 2 AP 69. 3 AP 88. 5 C a107. 7 AP32. 1 K 51. 2 K 70. 3 AP 89. 5 K a108. 7 K33. 1 K 52. 2 AP 71. 3 C 90. 5 K a109. 7 K34. 1 AP 53. 2 AP 72. 3 C 91. 5 K a110. 7 C35. 1 AP 54. 2 AP 73. 3 AP 92. 5 K a111. 7 K36. 1 AP 55. 2 K 74. 3 AP a93. 6 K a112. 7 K37. 1 AP 56. 2 K 75. 3 AP a94. 6 K a113. 7 K38. 1 K 57. 2 AP 76. 4 C a95. 6 K a114. 7 AP39. 1 K 58. 2 AP 77. 4 C a96. 6 K a115. 7 AP40. 1 AP 59. 2 AP 78. 4 K a97. 6 K a116. 7 AP41. 1 AP 60. 3 K 79. 4 AP a98. 6 K a117. 7 AP42. 1 AP 61. 3 C 80. 4 AP a99. 6 K a118. 7 C43. 2 K 62. 3 AP 81. 5 K a100. 6 K a119. 7 C44. 2 AP 63. 3 AP 82. 5 C a101. 6 K a120. 7 C45. 2 AP 64. 3 AP 83. 5 C a102. 6 K a121. 8 K46. 2 AP 65. 3 AP 84. 5 K a103. 7 AP a122. 8 K47. 2 AP 66. 3 AP 85. 5 AP a104. 7 AP a123. 8 C48. 2 AP 67. 3 AP 86. 5 AP a105. 7 AP a124. 8 K49. 2 AP 68. 3 AP 87. 5 C a106. 7 AP a125. 8 K

Brief Exercises126. 3 AP 128. 4 AP 130. 5 AP a132. 6 AP a134. 7 AP127. 3 AP 129. 4 AP 131. 5 AP a133. 6 AP a135. 7 AP

Exercises136. 2, 5 AP 140. 3 AP 144. 5 AN a148. 6 AP a152. 8 AP137. 3 AP 141. 4 AN 145. 5 AP a149. 7 AP a153. 8 AP138. 3 AP 142. 4 AN 146. 5 AP a150. 7 AP139. 3 AP 143. 4 AN a147. 6 K a151. 7 AP

Completion Statements154. 1 K 157. 3 K 160. 5 K a163. 7 K155. 2 K 158. 4 K a161. 6 K a164. 7 K

Test Bank for Managerial Accounting, Fifth Edition

156. 3 K 159. 5 K a162. 6 K a165. 8 K

aThis topic is dealt with in an Appendix to the chapter.SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Study Objective 1

1. TF 32. MC 35. MC 38. MC 41. MC2. TF 33. MC 36. MC 39. MC 42. MC

31. MC 34. MC 37. MC 40. MC 154. C

Study Objective 2

3. TF 44. MC 47. MC 50. MC 53. MC 56. MC 59. MC4. TF 45. MC 48. MC 51. MC 54. MC 57. MC 136. Ex

43. MC 46. MC 49. MC 52. MC 55. MC 58. MC 155. C

Study Objective 3

5. TF 10. TF 63. MC 68. MC 73. MC 137. Ex 157. C6. TF 11. TF 64. MC 69. MC 74. MC 138. Ex7. TF 60. MC 65. MC 70. MC 75. MC 139. Ex8. TF 61. MC 66. MC 71. MC 126. BE 140. Ex9. TF 62. MC 67. MC 72. MC 127. BE 156. C

Study Objective 4

12. TF 15. TF 78. MC 128. BE 142. Ex13. TF 76. MC 79. MC 129. BE 143. Ex14. TF 77. MC 80. MC 141. Ex 158. C

Study Objective 5

16. TF 20. TF 84. MC 88. MC 92. MC 145. Ex17. TF 81. MC 85. MC 89. MC 130. BE a146. Ex18. TF 82. MC 86. MC 90. MC 131. BE 159. C19. TF 83. MC 87. MC 91. MC 144. Ex 160. C

Study Objective 6a

21. TF 93. MC 96. MC 99. MC 102. MC 147. Ex 162. C22. TF 94. MC 97. MC 100. MC 132. BE 148. Ex23. TF 95. MC 98. MC 101. MC 133. BE 161. C

Study Objective 7a

24. TF 104. MC 109. MC 114. MC 119. MC 150. Ex25. TF 105. MC 110. MC 115. MC 120. MC 151. Ex26. TF 106. MC 111. MC 116. MC 134. BE 163. C27. TF 107. MC 112. MC 117. MC 135. BE 164. C

103. MC 108. MC 113. MC 118. MC 149. Ex

Study Objective 8a

28. TF 30. TF 122. MC 124. MC 152. Ex 165. C29. TF 121. MC 123. MC 125. MC 153. Ex

Note: TF = True-False C = Completion Ex = ExerciseMC = Multiple Choice BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

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Cost-Volume-Profit Analysis: Additional Issues

CHAPTER STUDY OBJECTIVES

1. Describe the essential features of a cost-volume-profit income statement. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement.

2. Apply basic CVP concepts. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-even point in units is fixed costs divided by contribution margin per unit. The break-even point in dollars is fixed cost divided by the contribution margin ratio. These formulas can also be used to determine units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage.

3. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars is calculated using the weighted-average contribution margin ratio.

4 Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income.

5. Understand how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage will experience a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage can be measured by dividing contribution margin by net income.

a6. Explain the difference between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs.

a7. Discuss net income effects under absorption costing versus variable costing. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period.

a8. Discuss the merits of absorption versus variable costing for management decision making. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

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TRUE-FALSE STATEMENTS

1. The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

2. In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

3. When a company is in its early stages of operation, its primary goal is to generate a target net income.

Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

4. The margin of safety tells a company how far sales can drop before it will be operating at a loss.

Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

5. Sales mix is a measure of the percentage increase in sales from period to period.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

6. Sales mix is not important to managers when different products have substantially different contribution margins.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

7. The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

8. If Conan Corporation sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

Ans: T, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

Ans: T, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

10. Net income can be increased or decreased by changing the sales mix.

Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

11. The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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12. When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

13. When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

14. If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

15. According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

16. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: T, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

17. Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

18. The degree of operating leverage provides a measure of a company’s earnings volatility.


19. If O’Brien Company has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

Ans: T, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

20. A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

a21. Variable costing is the approach used for external reporting under generally accepted accounting principles.

Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a22. The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

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a23. Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a24. Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Ans: F, SO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a25. Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Ans: F, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a26. When units produced exceed units sold, income under absorption costing is higher than income under variable costing.


a27. When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Ans: F, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a28. When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a29. When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Ans: T, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

a30. The use of absorption costing facilitates cost-volume-profit analysis.

Ans: F, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. T 6. F 11. F 16. T a21. F a26. T2. F 7. T 12. T 17. F a22. T a27. F3. F 8. T 13. F 18. T a23. T a28. T4. T 9. T 14. T 19. T a24. F a29. T5. F 10. T 15. T 20. F a25. F a30. F

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MULTIPLE CHOICE QUESTIONS

31. Cost-volume-profit analysis is the study of the effects ofa. changes in costs and volume on a company’s profit.b. cost, volume, and profit on the cash budget.c. cost, volume, and profit on various ratios.d. changes in costs and volume on a company’s profitability ratios.

Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

32. The CVP income statement classifies costsa. as variable or fixed and computes contribution margin.b. by function and computes a contribution margin.c. as variable or fixed and computes gross margin.d. by function and computes a gross margin.

Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

33. Contribution margin is the amount of revenue remaining after deductinga. cost of goods sold.b. fixed costs.c. variable costs.d. contra-revenue.

Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

34. Buerhrle’s CVP income statement included sales of 3,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $66,000. Contribution margin isa. $300,000.b. $180,000.c. $120,000.d. $54,000.

Ans: c, SO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

35. Buerhrle’s CVP income statement included sales of 3,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $66,000. Net income isa. $300,000.b. $120,000.c. $114,000.d. $54,000.

Ans: d, SO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

36. For Dye Company, at a sales level of 5,000 units, sales is $75,000, variable expenses total $40,000, and fixed expenses are $21,000. What is the contribution margin per unit?a. $2.80b. $7.00c. $8.00d. $15.00

Ans: b, SO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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37. If contribution margin is $100,000, sales is $300,000, and net income is $40,000, then variable and fixed expenses are

Variable Fixed a. $200,000 $260,000b. $200,000 $60,000c. $60,000 $200,000d. $400,000 $260,000

Ans: b, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

38. In a CVP income statement, cost of goods sold is generallya. completely a variable cost.b. completely a fixed cost.c. neither a variable cost nor a fixed cost.d. partly a variable cost and partly a fixed cost.

Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

39. In a CVP income statement, a selling expense is generallya. completely a variable cost.b. completely a fixed cost.c. neither a variable cost nor a fixed cost.d. partly a variable cost and partly a fixed cost.


40. Vazquez Company’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,680,000, what is its contribution margin?a. $360,000b. $960,000c. $1,020,000d. $1,080,000

Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA

41. Vazquez Company’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,680,000, what is its net income?a. $360,000b. $960,000c. $1,020,000d. $1,080,000

Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

42. Garland’s CVP income statement included sales of 3,000 units, a selling price of $50, variable expenses of $30 per unit, and net income of $25,000. Fixed expenses area. $35,000.b. $60,000.c. $90,000.d. $150,000.

Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

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43. The contribution margin ratio isa. sales divided by contribution margin.b. sales divided by fixed expenses.c. sales divided by variable expenses.d. contribution margin divided by sales.

Ans: d, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

44. For Danks Company, sales is $500,000, variable expenses are $310,000, and fixed expenses are $140,000. Danks’ contribution margin ratio isa. 10%.b. 28%.c. 38%.d. 62%.

Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

45. For Contreras Company, sales is $1,000,000, fixed expenses are $300,000, and the contribution margin per unit is $72. What is the break-even point?a. $1,388,889 sales dollarsb. $416,667 sales dollarsc. 13,889 unitsd. 4,167 units

Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

46. For Garland Company, sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is net income?a. $120,000b. $216,000c. $504,000d. $720,000


47. For Garland Company, sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What are the total variable expenses?a. $384,000b. $720,000c. $1,280,000d. $2,000,000


48. In 2011, Masset sold 3,000 units at $300 each. Variable expenses were $210 per unit, and fixed expenses were $120,000. What was Masset’s 2011 net income?a. $150,000b. $270,000c. $630,000d. $900,000

Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

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49. In 2011, Masset sold 3,000 units at $300 each. Variable expenses were $210 per unit, and fixed expenses were $120,000. The same selling price, variable expenses, and fixed expenses are expected for 2012. What is Masset’s break-even point in sales dollars for 2012?a. $400,000b. $800,000c. $900,000d. $1,285,714

Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

50. In 2011, Masset sold 3,000 units at $300 each. Variable expenses were $210 per unit, and fixed expenses were $180,000. The same selling price, variable expenses, and fixed expenses are expected for 2012. What is Masset’s break-even point in units for 2012?a. 2,000b. 4,500c. 6,429d. 10,000


51. The required sales in units to achieve a target net income isa. (sales + target net income) divided by contribution margin per unit.b. (sales + target net income) divided by contribution margin ratio.c. (fixed cost + target net income) divided by contribution margin per unit.d. (fixed cost + target net income) divided by contribution margin ratio.

Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

52. For Jon Company, sales is $1,500,000, fixed expenses are $450,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $300,000?a. $833,333b. $1,250,000c. $2,083,333d. $4,166,667

Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

53. Jenks Corporation reported sales of $2,000,000 last year (100,000 units at $20 each), when the break-even point was 80,000 units. Jenks’ margin of safety ratio isa. 20%.b. 25%.c. 80%.d. 120%.

Ans: a, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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54. For Bobby Company, sales is $1,200,000 (6,000 units), fixed expenses are $360,000, and the contribution margin per unit is $80. What is the margin of safety in dollars?a. $60,000b. $300,000c. $540,000d. $840,000

Ans: b, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

55. Margin of safety in dollars isa. expected sales divided by break-even sales.b. expected sales less break-even sales.c. actual sales less expected sales.d. expected sales less actual sales.

Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

56. The margin of safety ratio isa. expected sales divided by break-even sales.b. expected sales less break-even sales.c. margin of safety in dollars divided by expected sales.d. margin of safety in dollars divided by break-even sales.

Ans: c, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

57. In 2010, McDougal sold 3,000 units at $500 each. Variable expenses were $350 per unit, and fixed expenses were $390,000. The same variable expenses per unit and fixed expenses are expected for 2011. If McDougal cuts selling price by 4%, what is McDougal’s break-even point in units for 2011?a. 2,600b. 2,708c. 2,880d. 3,000

Ans: d, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

58. In 2010, Thornton sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $200,000. The same selling price is expected for 2011. Thornton is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Thornton’s break-even point in units for 2011?a. 800b. 960c. 1,000d. 1,200


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59. In 2010, Logan sold 1,000 units at $500 each, and earned net income of $50,000. Variable expenses were $300 per unit, and fixed expenses were $150,000. The same selling price is expected for 2011. Logan’s variable cost per unit will rise by 10% in 2011 due to increasing material costs, so they are tentatively planning to cut fixed costs by $15,000. How many units must Logan sell in 2011 to maintain the same income level as 2010?a. 794b. 971c. 1,176d. 1,088


60. Sales mix is a. the relative percentage in which a company sells its multiple products.b. the trend of sales over recent periods.c. the mix of variable and fixed expenses in relation to sales.d. a measure of leverage used by the company.

Ans: a, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

61. In a sales mix situation, at any level of units sold, net income will be higher ifa. more higher contribution margin units are sold than lower contribution margin units.b. more lower contribution margin units are sold than higher contribution margin units.c. more fixed expenses are incurred.d. weighted-average unit contribution margin decreases.

Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

62. Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $36 and a selling price of $60. Q-Chip Plus has variable costs per unit of $42 and a selling price of $78. The weighted-average unit contribution margin for Konerko isa. $28.b. $30.c. $32.d. $60.


63. Iguchi Company sells 2,000 units of Product A annually, and 3,000 units of Product B annually. The sales mix for Product A isa. 40%.b. 60%.c. 67%.d. cannot determine from information given.


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64. Konerko Company sells two types of computer chips. The sales mix is 30% (Q-Chip) and 70% (Q-Chip Plus). Q-Chip has variable costs per unit of $36 and a selling price of $60. Q-Chip Plus has variable costs per unit of $42 and a selling price of $78. Konerko’s fixed costs are $540,000. How many units of Q-Chip would be sold at the break-even point?a. 5,063b. 5,869c. 9,000d. 11,813


Use the following information for questions 65 and 66.

Uribe Company has a weighted-average unit contribution margin of $20 for its two products, Standard and Supreme. Expected sales for Uribe are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000.

65. How many Standards would Uribe sell at the break-even point?a. 36,000b. 54,000c. 60,000d. 90,000


66. At the expected sales level, Uribe’s net income will bea. $(800,000).b. $ - 0 -.c. $200,000.d. $2,000,000.

Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Use the following information for questions 67–70.

Fields Corporation has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Fields incurs $3,330,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%.

67. The weighted-average contribution margin ratio isa. 37%.b. 40%.c. 43%.d. 50%.


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68. The break-even point in dollars isa. $1,232,100.b. $7,744,186.c. $8,325,000.d. $9,000,000.


69. What will sales be for the Sporting Goods Division at the break-even point?a. $2,700,000b. $3,150,000c. $5,033,721d. $5,850,000


70. What will be the total contribution margin at the break-even point?a. $2,865,350b. $3,330,000c. $3,360,000d. $3,870,000

Ans: b, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

71. A shift from low-margin sales to high-margin salesa. may increase net income, even though there is a decline in total units sold.b. will always increase net income.c. will always decrease net income.d. will always decrease units sold.

Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

72. A shift from high-margin sales to low-margin salesa. may decrease net income, even though there is an increase in total units sold.b. will always decrease net income.c. will always increase net income.d. will always increase units sold.


Innova Discs has two divisions—Standard and Premium. Each division has hundreds of different types of golf discs and disc golf products. The following information is available:

Standard Division Premium Division Total Sales $400,000 $600,000 $1,000,000Variable costs 280,000 360,000Contribution margin $120,000 $240,000Total fixed costs $270,000

Ans: a, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

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73. What is the weighted-average contribution margin ratio?a. 34%b. 35%c. 36%d. 50%


74. What is the break-even point in dollars?a. $97,200b. $750,000c. $771,429d. $794,118


75. The sales mix percentages for Guillen’s Chicago and Charlotte Divisions are 70% and 30%. The contribution margin ratios are: Chicago (40%) and Charlotte (30%). Fixed costs are $888,000. What is Guillen’s break-even point in dollars?a. $310,800b. $2,400,000c. $2,537,142d. $2,690,909


76. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 2,000 machine hours available to manufacture a product, income will bea. $4,000 more if Product A is made.b. $4,000 less if Product B is made.c. $4,000 less if Product A is made.d. the same if either product is made.

Ans: c, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

77. Dye Company can sell all the units it can produce of either Plain or Fancy but not both. Plain has a unit contribution margin of $120 and takes two machine hours to make and Fancy has a unit contribution margin of $150 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Dye do?a. Make Fancy which creates $30 more profit per unit than Plain does.b. Make Plain which creates $10 more profit per machine hour than Fancy does.c. Make Plain because more units can be made and sold than Fancy.d. The same total profits exist regardless of which product is made.

Ans: b, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

78. What is the key factor in determining sales mix if a company has limited resources?a. Contribution margin per unit of limited resourceb. The amount of fixed costs per unitc. Total contribution margind. The cost of limited resources


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79. Jermaine’s Vittles can produce and sell only one of the following two products:

Oven ContributionHours Required Margin Per Unit

Crackers 0.2 $3Bread sticks 0.3 $4

The company has oven capacity of 900 hours. How much will contribution margin be if it produces only the most profitable product? a. $9,000b. $12,000c. $13,500d. $18,000


80. S-Pod’s contribution margin is $15 per unit for Product A and $18 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. How much is the contribution margin per unit of limited resource for each product?

A B a. $7.50 $4.50b. $7.50 $5.00c. $6.00 $4.50d. $6.00 $5.00


81. Cost structurea. refers to the relative proportion of fixed versus variable costs that a company incurs.b. generally has little impact on profitability.c. cannot be significantly changed by companies.d. refers to the relative proportion of operating versus nonoperating costs that a company

incurs.

Ans: a, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

82. Outsourcing production willa. reduce fixed costs and increase variable costs.b. reduce variable costs and increase fixed costs.c. have no effect on the relative proportion of fixed and variable costs.d. make the company more susceptible to economic swings.

Ans: a, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

83. Reducing reliance on human workers and instead investing heavily in computers and online technology willa. reduce fixed costs and increase variable costs.b. reduce variable costs and increase fixed costs.c. have no effect on the relative proportion of fixed and variable costs.d. make the company less susceptible to economic swings.

Ans: b, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

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84. Cost structure refers to the relative proportion ofa. selling expenses versus administrative expenses.b. selling and administrative expenses versus cost of goods sold.c. contribution margin versus sales.d. none of the above.

Ans: d, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management


Small Fry Company has sales of $1,250,000, variable costs of $650,000, and fixed costs of $480,000.

85. Small Fry’s degree of operating leverage isa. 1.08.b. 1.35.c. 1.25.d. 5.00.


86. Small Fry’s margin of safety ratio isa. .10.b. .20.c. .25.d. .80.


87. Which of the following statements is not true?a. Operating leverage refers to the extent to which a company’s net income reacts to a

given change in sales.b. Companies that have higher fixed costs relative to variable costs have higher

operating leverage.c. When a company’s sales revenue is increasing, high operating leverage is good

because it means that profits will increase rapidly.d. When a company’s sales revenue is decreasing, high operating leverage is good

because it means that profits will decrease at a slower pace than revenues decrease.

Ans: d, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

88. Scottie Company’s degree of operating leverage is 1.5. Erstadt Corporation’s degree of operating leverage is 4.5. Erstadt’s earnings would go up (or down) by ________ as much as Scottie’s with an equal increase (or decrease) in sales.a. 1/3b. 2 timesc. 3 timesd. 6 times

Ans: c, SO: 5, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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89. The margin of safety ratioa. is computed as actual sales divided by break-even sales.b. indicates what percent decline in sales could be sustained before the company would

operate at a loss.c. measures the ratio of fixed costs to variable costs.d. is used to determine the break-even point.

Ans: b, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

90. A cost structure which relies more heavily on fixed costs makes the companya. more sensitive to changes in sales revenue.b. less sensitive to changes in sales revenue.c. either more or less sensitive to changes in sales revenue, depending on other factors.d. have a lower break-even point.


91. A company with a higher contribution margin ratio isa. more sensitive to changes in sales revenue.b. less sensitive to changes in sales revenue.c. either more or less sensitive to changes in sales revenue, depending on other factors.d. likely to have a lower breakeven point.


92. The degree of operating leverage a. does not provide a reliable measure of a company’s earnings volatility. b. cannot be used to compare companies. c. is computed by dividing total contribution margin by net income.d. measures how much of each sales dollar is available to cover fixed expenses.


a93. Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when usinga. full costing.b. absorption costing.c. variable costing.d. product costing.


a94. When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is usinga. operations costing.b. absorption costing.c. variable costing.d. product costing.

Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

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a95. Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when usinga. full costing.b. absorption costing.c. product costing.d. variable costing.


a96. Under absorption costing and variable costing, how are fixed manufacturing costs treated?

Absorption Variablea. Product Cost Product Costb. Product Cost Period Costc. Period Cost Product Costd. Period Cost Period Cost

Ans: b, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a97. Under absorption costing and variable costing, how are variable manufacturing costs treated?


Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a98. Under absorption costing and variable costing, how are direct labor costs treated?


Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a99. Fixed selling expenses are period costsa. under both absorption and variable costing.b. under neither absorption nor variable costing.c. under absorption costing, but not under variable costing.d. under variable costing, but not under absorption costing.

Ans: a, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a100. Which cost is not charged to the product under variable costing?a. Direct materialsb. Direct laborc. Variable manufacturing overheadd. Fixed manufacturing overhead


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a101. Which cost is charged to the product under variable costing?a. Variable manufacturing overheadb. Fixed manufacturing overheadc. Variable administrative expensesd. Fixed administrative expenses


a102. Variable costinga. is used for external reporting purposes.b. is required under GAAP.c. treats fixed manufacturing overhead as a period cost.d. is also known as full costing.

Ans: c, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting


Briscoe Company sells its product for $60 per unit. During 2011, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.

a103. The per unit manufacturing cost under absorption costing isa. $24.b. $27.c. $39.d. $41.

Ans: c, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a104. The per unit manufacturing cost under variable costing isa. $24.b. $27.c. $39.d. $41.

Ans: b, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a105. Cost of goods sold under absorption costing isa. $1,350,000.b. $1,620,000.c. $1,950,000.d. $1,560,000.


a106. Ending inventory under variable costing isa. $270,000.b. $390,000.c. $600,000.d. $1,350,000.


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a107. Under absorption costing, what amount of fixed overhead is deferred to a future period?a. $30,000b. $120,000c. $150,000d. $720,000


a108. Net income under absorption costing is gross profit lessa. cost of goods sold.b. fixed manufacturing overhead and fixed selling and administrative expenses.c. fixed manufacturing overhead and variable manufacturing overhead.d. variable selling and administrative expenses and fixed selling and administrative

expenses.

Ans: d, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

a109. Net income under variable costing is contribution margin lessa. cost of goods sold.b. fixed manufacturing overhead and fixed selling and administrative expenses.c. fixed manufacturing overhead and variable manufacturing overhead.d. variable selling and administrative expenses and fixed selling and administrative

expenses.

Ans: b, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

a110. The manufacturing cost per unit for absorption costing isa. usually, but not always, higher than manufacturing cost per unit for variable costing.b. usually, but not always, lower than manufacturing cost per unit for variable costing.c. always higher than manufacturing cost per unit for variable costing.d. always lower than manufacturing cost per unit for variable costing.

Ans: c, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a111. The one primary difference between variable and absorption costing is that undera. variable costing, companies charge the fixed manufacturing overhead as an expense

in the current period.b. absorption costing, companies charge the fixed manufacturing overhead as an

expense in the current period.c. variable costing, companies charge the variable manufacturing overhead as an

expense in the current period.d. absorption costing, companies charge the variable manufacturing overhead as an

expense in the current period.

Ans: a, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a112. Net income under absorption costing is higher than net income under variable costinga. when units produced exceed units sold.b. when units produced equal units sold.c. when units produced are less than units sold.d. regardless of the relationship between units produced and units sold.


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a113. Some fixed manufacturing overhead costs of the current period are deferred to future periods undera. absorption costing.b. variable costing.c. both absorption and variable costing.d. neither absorption nor variable costing.



Jack Company sells its product for $6,600 per unit. Variable costs per unit are: manufacturing, $3,600, and selling and administrative, $75. Fixed costs are: $18,000 manufacturing overhead, and $24,000 selling and administrative. There was no beginning inventory at 1/1/10. Production was 20 units per year in 2010–2012. Sales was 20 units in 2010, 16 units in 2011, and 24 units in 2012.

a114. Income under absorption costing for 2011 isa. $4,800.b. $8,400.c. $9,600.d. $13,200.

Ans: b, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a115. Income under absorption costing for 2012 isa. $19,800.b. $23,400c. $24,600d. $28,200.


a116. Income under variable costing for 2011 isa. $4,800.b. $8,400c. $9,600d. $13,200.


a117. Income under variable costing for 2012 isa. $19,800.b. $23,400.c. $24,600.d. $28,200.

Ans: d, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

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a118. For the three years 2010–2012,a. absorption costing income exceeds variable costing income by $6,000.b. absorption costing income equals variable costing income.c. variable costing income exceeds absorption costing income by $6,000.d. absorption costing income may be greater than, equal to, or less than variable costing

income, depending on the situation.

Ans: b, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a119. When production exceeds sales,a. some fixed manufacturing overhead costs are deferred until a future period under

absorption costing.b. some fixed manufacturing overhead costs are deferred until a future period under

variable costing.c. variable and fixed manufacturing overhead costs are deferred until a future period

under absorption costing.b. variable and fixed manufacturing overhead costs are deferred until a future period

under variable costing.

Ans: a, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a120. When production exceeds sales,a. ending inventory under variable costing will exceed ending inventory under absorption

costing.b. ending inventory under absorption costing will exceed ending inventory under variable

costing.c. ending inventory under absorption costing will be equal to ending inventory under

variable costing.d. ending inventory under absorption costing may exceed, be equal to, or be less than

ending inventory under variable costing.

Ans: b, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a121. Management may be tempted to overproduce when usinga. variable costing, in order to increase net income.b. variable costing, in order to decrease net income.c. absorption costing, in order to increase net income.d. absorption costing, in order to decrease net income.

Ans: c, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a122. If a division manager’s compensation is based upon the division’s net income, the manager may decide to meet the net income targets by increasing production when usinga. variable costing, in order to increase net income.b. variable costing, in order to decrease net income.c. absorption costing, in order to increase net income.d. absorption costing, in order to decrease net income.

Ans: c, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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a123. Expected sales for next year for the Huxtable Division is 150,000 units. Bill Cosby, manager of the Huxtable Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 150,000 units or 180,000 units. The Huxtable Division will have higher net income if Bill Cosby decides to producea. 180,000 units if income is measured under absorption costing.b. 180,000 units if income is measured under variable costing.c. 150,000 units if income is measured under absorption costing.d. 150,000 units if income is measured under variable costing.

Ans: a, SO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a124. Which of the following is a potential advantage of variable costing relative to absorption costing?a. Net income is affected by changes in production levels.b. The use of variable costing is consistent with cost-volume-profit analysis.c. Net income computed under variable costing is not closely tied to changes in sales

levels.d. More than one of the above.

Ans: b, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

a125. Companies that use just-in-time processing techniques willa. have greater differences between absorption and variable costing net income.b. have smaller differences between absorption and variable costing net income.c. not be able to use absorption costing.d. not be able to use variable costing.

Ans: b, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

31. a 45. d 59. d 73. c 87. d a101. a a115. c32. a 46. a 60. a 74. b 88. c a102. c a116. a33. c 47. c 61. a 75. b 89. b a103. c a117. d34. c 48. a 62. c 76. c 90. a a104. b a118. b35. d 49. a 63. a 77. b 91. a a105. c a119. a36. b 50. a 64. a 78. a 92. c a106. a a120. b37. b 51. c 65. a 79. c a93. c a107. b a121. c38. d 52. c 66. c 80. a a94. b a108. d a122. c39. d 53. a 67. a 81. a a95. d a109. b a123. a40. b 54. b 68. d 82. a a96. b a110. c a124. b41. a 55. b 69. d 83. b a97. a a111. a a125. b42. a 56. c 70. b 84. d a98. a a112. a43. d 57. d 71. a 85. d a99. a a113. a44. c 58. a 72. a 86. b a100. d a114. b

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BRIEF EXERCISES

BE 126

Haldi Corporation sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $80 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%.

InstructionsWhat is the weighted-average unit contribution margin?

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 126 (6–8 min.)

Sleek: 50% × ($30 – $18) = $ 6Smooth: 30% × ($50 – $30) = 6Potent: 20% × ($80 – $45) = 7Weighted-average unit contribution margin $19

BE 127

Garrett Corporation sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 35%; and Deluxe, 45%. Garrett’s fixed costs are $1,950,000.

InstructionsWhat is the dollar amount of Deluxe sales at the break-even point?



Standard: 60% × 35% = 21%Deluxe: 40% × 45% = 18%Weighted-average contribution margin ratio 39%

$1,950,000 ÷ 39% = $5,000,000 break-even point in dollars

Dollar amount of Deluxe sales at the break-even point: $5,000,000 × 40% = $2,000,000.

BE 128

Carpenter Company provided the following information concerning two products:

Product 12 Product 43Contribution margin per unit $20 $18Machine hours required for one unit 2 hours 1.5 hours

InstructionsCompute the contribution margin per unit of limited resource for each product. Which product should Carpenter tell its sales personnel to “push” to customers?

Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

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Product 12: $20 ÷ 2.0 hours = $10Product 43: $18 ÷ 1.5 hours = $12Sales personnel should push Product 43.

BE 129

Ace Company makes two products, footballs and baseballs. Additional information follows:

Footballs BaseballsUnits 2,000 3,000Sales $60,000 $25,000Variable costs 24,000 13,750Fixed costs 10,000 5,250Net income $26,000 $ 6,000Yards of leather per unit 1.25 0.25Profit per unit $13.00 $2.00Contribution margin per unit $18.00 $3.75

Assume that Ace is able to order an additional 2,000 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 400 of each product are necessary for sales.

InstructionsHow many units of each must be produced?

Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Footballs BaseballsContribution margin per yard $18 ÷ 1.25 = $14.40 $3.75 ÷ .25 = $15

Produce more baseballs since CM per constraint is more.

Minimum for footballs: 400 × 1.25 yd. = 500 yd.Material remaining for baseballs: 2,000 – 500 = 1,500 yd.# of baseballs: 1,500 ÷ .25 = 6,000 baseballs

BE 130

Norton Corporation is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $325,000. Net income is expected to remain the same at $100,000.

InstructionsCompute the degree of operating leverage before and after the purchase of the new equipment and interpret your results.

Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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Contribution margin ÷ Net Income = Degree of operating leverageBefore: $250,000 ÷ $100,000 = 2.50After $325,000 ÷ $100,000 = 3.25

After the new equipment is purchased, Norton’s earnings would go up (or down) by 1.3 times (3.25 ÷ 2.50) as much as it would have before the purchase, with an equal increase (or decrease) in sales.

BE 131

The degree of operating leverage for Adams Corp. and Grant Co. are 2.4 and 5.6 respectively. Both have net incomes of $75,000. Determine their respective contribution margins.

Ans: N/A, SO: 5, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


Degree of operating leverage = Contribution margin ÷ Net Income

Adams Corp. 2.4 = Contribution margin ÷ $75,000Contribution margin = $75,000 × 2.4 = $180,000

Grant Co. 5.6 = Contribution margin ÷ 75,000Contribution margin = $75,000 × 5.6 = $420,000

aBE 132

Huskie Company produces footballs. It incurred the following costs this year:

Direct materials $25,000Direct labor 31,000Fixed manufacturing overhead 22,000Variable manufacturing overhead 38,000Fixed selling and administrative expenses 23,000Variable selling and administrative expenses 14,000

InstructionsWhat are the total product costs for the company under variable costing?

Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

aSolution 132 (3–5 min.)

Direct materials $25,000Direct labor 31,000Variable manufacturing overhead 38,000Total product costs under variable costing $94,000

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aBE 133

Huskie Company produces footballs. It incurred the following costs this year:

Direct materials $25,000Direct labor 31,000Fixed manufacturing overhead 22,000Variable manufacturing overhead 38,000Fixed selling and administrative expenses 23,000Variable selling and administrative expenses 14,000

InstructionsWhat are the total product costs for the company under absorption costing?

Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management


Direct materials $ 25,000Direct labor 31,000Fixed manufacturing overhead 22,000Variable manufacturing overhead 38,000Total product costs under absorption costing $116,000

aBE 134

During 2011, Nowak Corporation produced 60,000 units and sold 50,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

InstructionsPrepare a variable costing income statement.

Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting


Sales (50,000 × $10) $500,000Variable cost of goods sold (50,000 × $4) $200,000Variable selling and administrative expenses (50,000 × $1) 50,000 250,000Contribution margin 250,000Fixed manufacturing overhead 120,000Fixed selling and administrative expenses 30,000 150,000Net income $100,000

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aBE 135

During 2011, Nowak Corporation produced 60,000 units and sold 50,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

InstructionsPrepare an absorption costing income statement.



Sales (50,000 × $10) $500,000Cost of goods sold (50,000 × $6) 300,000Gross margin 200,000Variable selling and administrative expenses (50,000 × $1) $50,000Fixed selling and administrative expenses 30,000 80,000Net income $120,000

EXERCISES

Ex. 136

Webster Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 15% of sales. The income statement for the year ending December 31, 2011, is as follow.

WEBSTER CORPORATIONIncome Statement

Year Ending December 31, 2011Sales $130,000Cost of goods sold

Variable $58,500,Fixed 14,350, 72,850Gross margin 57,150

Selling and marketing expensesCommissions $19,500Fixed costs 17,100 36,600Operating income $ 20,550

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million.

Instructions(a) Under the current policy of using a network of sales agents, calculate the Webster

Corporation's break-even point in sales dollars for the year 2011.(b) Calculate the company's break-even point in sales dollars for the year 2011 if it hires its own

sales force to replace the network of agents.(c) Calculate the degree of operating leverage at sales of $130 million if (1) Webster uses sales

agents, and (2) Webster employs its own sales staff.

Ans: N/A, SO: 2, 5, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

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(b) Reformat the income statement to CVP format All amount are in $000s.Sales........................................................................... $130,000Variable costs (58,500 + 19,500)................................. 78,000Contribution margin..................................................... 52,000Less: Fixed costs (14,350 + 17,100)............................ 31,450Operating income........................................................ 20,550Contribution margin ratio = $52,000 + $130,000 = 40%Break-even point = $31,450 + 40% = 78,625

(b) If a hired workforce replaces sales agents, commissions will be reduced to 10% of sales, or $13,000, but fixed costs will increase by $13,000.Sales........................................................................... $130,000Variable costs (58,500 + 13,000)................................. 71,500Contribution margin..................................................... 58,500Less: Fixed costs (31,450 + 13,000)............................ 44,450Operating income........................................................ 14,050

Contribution margin ratio = 58,500 ÷ 130,000 = 45%Break-even point = 44,450 ÷ 45% = 98,778

(c) Operating leverage = contribution margin ÷ operating incomeCurrent situation: from part (a)52,000 ÷ 20,550 = 2.53Proposed situation: from part (b)58,500 ÷ 14,050 = 4.16

Ex. 137

Quick Auto has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $12,000,000 (that is, $60,000 per service outlet).

Instructions(a) Calculate the dollar amount of each type of service that the company must provide in order

to break even.(b) The company has a desired net income of $40,000 per service outlet. What is the dollar

amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?


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(a)Weighted-Average

Sales Mix Contribution Contribution Percentage Margin Ratio Margin Ratio

Oil changes 70% × 20% .14Brake repair 30% × 60% .18

.32Total break-even sales in dollars = $12,000,000 ÷ .32 = $37,500,000

Total Sales DollarsSales Mix Break-even Sales Needed

Percentage in Dollars Per Product Oil changes 70% × $37,500,000Brake repair 30% × $37,500,000Total sales $37,500,000

(b)Sales to achieve target net income = ($60,000 + $40,000) ÷ .32 = $312,500

Sales DollarsSales Mix Total Needed Per Product

Percentage Sales Needed Per Store Oil changes 70% × $312,500Brake repair 30% × $312,500Total sales $312,500

Ex. 138

Trail King manufactures mountain bikes. It has fixed costs of $4,620,000. Trail King’s sales mix and contribution margin per unit is shown as follows:

Sales Mix Contribution MarginDestroyer 20% $120Voyager 50% $ 60Rebel 30% $ 40

InstructionsCompute the number of each type of bike that the company would need to sell in order to break even under this product mix.

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Weighted-AverageSales Mix × Contribution Margin Contribution Margin

Destroyer 20% × $120 $24Voyager 50% × $ 60 $30Rebel 30% × $ 40 $12

$66Total break-even sales = $4,620,000 ÷ $66 = 70,000 bikes

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Ex 138 (cont.)

Sales MixDestroyer 20% × 70,000 = 14,000 bikesVoyager 50% × 70,000 = 35,000 bikesRebel 30% × 70,000 = 21,000 bikes

Ex. 139

Account-Able Company provides primarily two lines of service: accounting and tax. Accounting-related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $5,100,000.

Instructions(a) Calculate the revenue from each type of service that the company must achieve to break

even.(b) The company has a desired net income of $1,700,000. What amount of revenue would

Account-Able earn from tax services if it achieves this goal with the current sales mix?



(a) Contribution Weighted-AverageSales Mix Margin Ratio Contribution Margin Ratio

Accounting 60% 30% 18%Tax 40% 40% 16%

34%Total break-even sales = $5,100,000 ÷ .34 = $15,000,000

Sales MixAccounting 60% × $15,000,000 = $9,000,000Tax 40% × $15,000,000 = $6,000,000

(b) Sales to achieve target net income = ($5,100,000 + $1,700,000) ÷ .34 = $20,000,000

Sales MixTax 40% × $20,000,000 = $8,000,000

Ex. 140

Mad City Flash Company sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below:

Computers VG Systems Total Sales $700,000 $300,000 $1,000,000Variable costs 420,000 210,000 630,000Contribution margin $280,000 $ 90,000 370,000Fixed costs 259,000Net income $ 111,000

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Ex 140 (cont.)

Instructions(a) Determine the sales mix and contribution margin ratio for each division.(b) Calculate the company’s weighted-average contribution margin ratio.(c) Calculate the company’s break-even point in dollars.(d) Determine the sales level, in dollars, for each division at the break-even point.

Ans: N/A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


(a) Sales mix:Computers: $700,000 ÷ ($700,000 + $300,000) = 70%VG Systems $300,000 ÷ ($700,000 + $300,000) = 30%

Contribution margin ratio:Computers: $280,000 ÷ $700,000 = 40%VG Systems: $ 90,000 ÷ $300,000 = 30%

(b) Weighted-average contribution margin ratio = (70% × 40%) + (30% × 30%) = 37%

(c) Break-even point in dollars = $259,000 ÷ .37 = $700,000

(d) Sales dollars at break-even point:Computers: $700,000 × .70 = $490,000VG Systems: $700,000 × .30 = $210,000

Ex. 141

Movie House Company has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product:

Product 22 Product 44Sales price $20 $40Direct materials 6 8Direct labor 3 2Variable manufacturing overhead 4 5Fixed manufacturing overhead 3 5Machine time required 15 minutes 60 minutes

InstructionsManagement wants to know which product to produce in order to maximize the company’s income. Taking into consideration the constraints under which the company operates, prepare a report to show which product should be produced and sold.

Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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Contribution margin per unit Product 22 Product 44 Sales price $20 $40Variable costs

Direct material $6 $8Direct labor 3 2Variable overhead 4 13 5 15

Contribution margin $ 7 $25

Machine hours required: 1/4 hr 1 hr

Contribution margin per unit of limited resource:($7 ÷ .25) $ 28($25 ÷ 1) $ 25

Machine hours available × 4,000 × 4,000 Contribution margin $112,000 $100,000

The company should produce and sell Product 22.

Ex. 142

PHR Company manufactures and sells two products. Relevant per unit data concerning each product are given below:

Product Standard Deluxe

Selling price $50 $75Variable costs $24 $30Machine hours 2 3

Instructions(a) Compute the contribution margin per unit of limited resource for each product.(b) If 1,000 additional machine hours are available, which product should be manufactured?

Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


(a) Product Standard Deluxe

Contribution margin per unit $26 $45Machine hours required ÷ 2 ÷ 3 Contribution margin per unit of limited resource $13 $15

(b) The Deluxe product should be manufactured because it results in the highest contribution margin per machine hour: $15 × 1,000 = $15,000.

Ex. 143

Higgins Inc. produces and sells three products. Unit data concerning each product is shown below.

Product X Y Z

Selling price $200 $300 $250Direct labor costs 30 75 45Other variable costs 110 90 121

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Ex 143 (cont.)

The company has 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15.

Instructions(a) Determine the number of direct labor hours per unit.(b) Determine the contribution margin per direct labor hour.(c) Determine which product should be produced and the total contribution margin for that

product.

Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


(a) Product X: $30 ÷ $15 = 2 hours per unitProduct Y: $75 ÷ $15 = 5 hours per unitProduct Z: $45 ÷ $15 = 3 hours per unit

(b) Product X Y Z

Selling price $200 $300 $250Variable costs 140 165 166Contribution margin 60 135 84Direct labor hours per unit ÷ 2 ÷ 5 ÷ 3 Contribution margin per direct labor hour $ 30 $ 27 $ 28

(c) Product X should be produced because it generates the highest contribution margin per direct labor hour.

Product XTotal direct labor hours available 2,000Contribution margin per direct labor hour 30Total contribution margin $60,000

Ex. 144

Vasquez Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Javier Vasquez the owner, is considering replacing the draftsmen with a computerized drafting system.

However before making the change Javier would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual System Computerized SystemSales $1,500,000 $1,500,000Variable costs 1,200,000 900,000Contribution margin 300,000 600,000Fixed costs 100,000 400,000Net income $200,000 $200,000

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Ex. 144 (cont.)

Instructions(a) Determine the degree of operating leverage for each alternative.(b) Which alternative would produce the higher net income if sales increased by $200,000?

Ans: N/A, SO: 5, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


(a) Contribution Margin ÷ Net Income = Degree ofOperating Leverage

Manual system $300,000 ÷ $200,000 = 1.50Computerized system $600,000 ÷ $200,000 = 3.00

(b) The computerized system would produce profits that are 2.0 times (3.00 ÷ 1.50) as much as the manual system. With a $200,000 increase in sales, net income would increase $40,000 ($240,000 - $200,000) under the manual system and $80,000 (&280,000 - $200,000) under the computerized system

Manual System Computerized SystemSales $1,700,000 $1,700,000Variable costs 1,360,000* 1,020,000**Contribution margin 340,000 680,000Fixed costs 100,000 400,000Net income $240,000 $280,000

*($1,200,000 ÷ $1,500,000) × $1,700,000**($900,000 ÷ $1,500,000) × $1,700,000

Ex. 145

The following CVP income statements are available for Antique Company and Contemporary Company.

Antique Company Contemporary CompanySales revenue $700,000 $700,000Variable costs 350,000 210,000Contribution margin 350,000 490,000Fixed costs 150,000 290,000Net income $200,000 $200,000

Instructions(a) Compute the degree of operating leverage for each company.(b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each

company.



(a) Contribution Margin ÷ Net Income = Degree of Operating LeverageAntique $350,000 ÷ $200,000 = 1.75Contemporary $490,000 ÷ $200,000 = 2.45

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Solution 145 (cont.)(b) Antique Company Contemporary Company

Sales revenue $560,000* $560,000*Variable costs 280,000** 168,000***Contribution margin 280,000 392,000Fixed costs 150,000 290,000Net income $130,000 $102,000

*$700,000 × .8**($350,000 ÷ $700,000) × $560,000***($210,000 ÷ $700,000) × $560,000

Ex. 146

An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Fireside Company uses a labor-intensive approach and Stirring Moments Company uses a mechanized system. Variable costing income statements for the two companies are shown below:

Fireside Stirring MomentsSales $1,000,000 $1,000,000Variable costs 650,000 300,000Contribution margin 350,000 700,000Fixed costs 150,000 500,000Net Income $ 200,000 $ 200,000

The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability.

Instructions(a) Calculate each company’s degree of operating leverage.(b) Determine the effect on each company’s net income if sales decrease by 10% and if sales

increase by 20%. Do not prepare income statements.



(a) Contribution Margin ÷ Net Income = Degree of Operating LeverageFireside $350,000 ÷ $200,000 = 1.75St. Moments $700,000 ÷ $200,000 = 3.50

(b) Degree of % Change in% Change in Sales × Operating Leverage = Net Income

Fireside (10%) × 1.75 = (17.5%)St. Moments (10%) × 3.50 = (35.0%)

Fireside 20% × 1.75 = 35.0%St. Moments 20% × 3.50 = 70.0%

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aEx. 147

Indicate with a check mark whether each of the following would be a product cost or a period cost under an absorption or a variable system for Carson Company.

Absorption Variable Product Period Product Period

a. Direct materials _________ _________ _________ _________

b. Direct labor _________ _________ _________ _________

c. Factory utilities _________ _________ _________ _________

d. Factory rent _________ _________ _________ _________

e. Indirect labor _________ _________ _________ _________

f. Factory supervisor salaries _________ _________ _________ _________

g. Factory maintenance (variable) _________ _________ _________ _________

h. Factory depreciation _________ _________ _________ _________

i. Sales salaries _________ _________ _________ _________

j. Sales commissions _________ _________ _________ _________

Ans: N/A, SO: 6, Bloom: K, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management


Absorption Variable Product Period Product Period

a. Direct materials ____ ____ _____ _____ ____ ____ ____ _____ b. Direct labor ____ ____ _____ _____ ____ ____ ____ _____ c. Factory utilities ____ ____ _____ _____ ____ ____ ____ _____ d. Factory rent ____ ____ _____ _____ _____ _____ ___ ____ e. Indirect labor ____ ____ _____ _____ ____ ____ ____ _____ f. Factory supervisor salaries ____ ____ _____ _____ _____ _____ ___ ____ g. Factory maintenance (variable) ____ ____ _____ _____ ____ ____ ____ _____ h. Factory depreciation ____ ____ _____ _____ _____ _____ ___ ____ i. Sales salaries _____ _____ ____ ____ _____ _____ ___ ____ j. Sales commissions _____ _____ ____ ____ _____ _____ ___ ____

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aEx. 148

Fresh Air Products Company manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:

Manufacturing CostsFixed Overhead $120,000Variable overhead $3 per unitDirect labor $12 per unitDirect material $30 per unit

Beginning inventory 0 unitsUnits produced 10,000Units sold 8,000

Selling and Administrative CostsFixed $200,000Variable $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement.

InstructionsAssume the company uses absorption costing. Calculate the production cost per unit and prepare an income statement for the month of June, 2011.



Per UnitDirect materials $30Direct labor 12Variable overhead 3Fixed overhead ($120,000 ÷ 10,000) 12

Total cost $57

Fresh Air Products CompanyIncome Statement (Absorption Costing)

For the Month Ending June 30, 2011

Sales (8,000 × $110) $880,000Less: Cost of goods sold (8,000 × $57) 456,000Gross profit 424,000Less: Selling and administrative costs

Variable (8,000 × $4) $ 32,000Fixed 200,000 232,000

Net income $ 192,000

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aEx. 149

Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory):

Variable production costs $90 per bikeFixed production costs $500,000Variable selling and administrative costs $22 per bikeFixed selling and administrative costs $520,000Selling price $200 per bikeProduction 20,000 bikesSales 18,000 bikes

Instructions(a) Prepare a brief income statement using absorption costing.(b) Compute the amount to be reported for inventory in the year-end absorption costing balance

sheet.



(a) Sales (18,000 × $200) $3,600,000Less: Cost of goods sold (18,000 × $115*) 2,070,000Gross profit 1,530,000Less: selling and administrative costs

[(18,000 × $22) + $520,000] 916,000Net income $ 614,000

*Variable production costs $ 90 per bikeFixed production costs ($500,000 ÷ 20,000) 25 per bike

Total cost of goods sold per unit $115 per bike

(b) (20,000 – 18,000) × $115 = $230,000

aEx. 150

Momentum Bikes Company manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory):

Variable production costs $95 per bikeFixed production costs $500,000Variable selling and administrative costs $22 per bikeFixed selling and administrative costs $520,000Selling price $200 per bikeProduction 20,000 bikesSales 16,000 bikes

Instructions(a) Prepare a brief income statement using variable costing.(b) Compute the amount to be reported for inventory in the year-end variable costing balance

sheet.


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(a) Sales (16,000 × $200) $3,200,000Less: Variable costs

Variable cost of goods sold (16,000 × $95) $1,520,000Variable selling and admin. costs (16,000 × $22) 352,000 1,872,000

Contribution margin 1,328,000Less: Fixed costs

Fixed production costs 500,000Fixed selling and administrative costs 520,000 1,020,000

Net income $ 308,000

(b) (20,000 – 16,000) × $95 = $380,000

aEx. 151

Dolan Company produces sporting equipment. In 2011, the first year of operations, Dolan produced 25,000 units and sold 22,000 units. In 2012, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000.

Instructions(a) Compute the net income under variable costing for each year.(b) Compute the net income under absorption costing for each year.(c) Reconcile the differences each year in income from operations under the two costing

approaches.



(a) 2011: [22,000 × ($100 – $40 – $8)] – ($540,000 + $200,000)] = $404,0002012: [25,000 × ($100 – $40 – $8)] – ($540,000 + $200,000)] = $560,000

(b) 2011: [22,000 × ($100 – $40 – $21.60)] – ($200,000 + ($22,000 × $8)] = $468,8002012: {[25,000 × $100) – [3,000 × ($40 + $21.60)] – [(22,000 × $40) + (22,000 × $540,000/22,000)]} – [$200,000 + (25,000 × $8)] = $495,200

(c) The variable costing and the absorption costing income can be recorded as follows:

2011 variable costing income $404,000Fixed manufacturing costs deferred at 12/31/11

under absorption costing (3,000 × $21.60) 64,8002011 absorption costing income $468,800

2012 variable costing income $560,000Fixed manufacturing costs expensed in 2012

under absorption costing (3,000 × $21.60) (64,800)2012 absorption costing income $495,200

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aEx. 152

McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. George Harrison, division manager, is considering producing either 30,000 or 40,000 units during the period. Other information is presented in the schedule below:

Division Information – 2011Beginning inventory 0Expected sales in units 30,000Selling price per unit $25Variable manufacturing cost per unit $7Fixed manufacturing overhead costs (total) $480,000Fixed manufacturing overhead costs per unit

Based on 30,000 units ($480,000 ÷ 30,000) $16Based on 40,000 units ($480,000 ÷ 40,000) $12

Manufacturing cost per unitBased on 30,000 units ($7 variable + $16 fixed) $23Based on 40,000 units ($7 variable + $12 fixed) $19

Selling and administrative expenses (all fixed) $25,000

Instructions(a) Prepare an absorption costing income statement with one column showing the results if

30,000 units are produced and one column showing the results if 40,000 units are produced.(b) Why is income different for the two production levels when sales is 30,000 units either way?



(a) McCartney Pumps DivisionIncome Statement (Absorption Costing)

For the Year Ended 2011

30,000 Produced 40,000 ProducedSales (30,000 units × $25) $750,000 $750,000Cost of goods sold 690,000 (30,000 × $23) 570,000 (30,000 × $19)Gross profit 60,000 180,000Fixed selling and admin. expenses 25,000 25,000Net income $ 35,000 $155,000

(b) Net income is $120,000 higher when 40,000 units are produced because under absorption costing, $120,000 of fixed manufacturing costs (10,000 × $12) are deferred to the next year.

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aEx. 153

McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $20 per unit. George Harrison, division manager, is considering producing either 30,000 or 50,000 units during the period. Other information is presented in the schedule below:

Division Information – 2011Beginning inventory 0Expected sales in units 30,000Selling price per unit $20Variable manufacturing cost per unit $7Fixed manufacturing overhead costs (total) $300,000Fixed manufacturing overhead costs per unit

Based on 30,000 units ($300,000 ÷ 30,000) $10Based on 50,000 units ($300,000 ÷ 50,000) $6

Manufacturing cost per unitBased on 30,000 units ($7 variable + $10 fixed) $17Based on 50,000 units ($7 variable + $6 fixed) $13

Selling and administrative expenses (all fixed) $25,000

InstructionsPrepare a variable costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 50,000 units are produced.



McCartney Pumps DivisionIncome Statement (Variable Costing)

For the Year Ended 2011

30,000 Produced 50,000 ProducedSales (30,000 units × $20) $600,000 $600,000Variable cost of goods sold (30,000 × $7) 210,000 210,000Contribution margin 390,000 390,000Fixed manufacturing overhead 300,000 300,000Fixed selling and administrative expenses 25,000 25,000Net income $ 65,000 $ 65,000

COMPLETION STATEMENTS

154. The ______________ income statement classifies cost as variable or fixed and computes

a contribution margin.

Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

155. _________________ tells a company how far sales can drop before it will be operating at

a loss.

Ans: N/A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

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156. ___________________ is the relative percentage in which a company sells its multiple

products.

Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

157. When more than one product is sold, the break-even point can be determined by dividing

fixed expenses by _______________________.

Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

158. When a company has ________________, management must decide which products to

make and sell in order to maximize net income.

Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

159. ___________________ refers to the relative proportion of fixed versus variable costs that

a company incurs.


160. The _________________________ provides a measure of a company’s earnings volatility

and can be used to compare companies.

Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a161. Under _____________________ all manufacturing costs are charged to, or absorbed by,

the product.


a162. Fixed manufacturing costs are treated as period costs under ______________________.


a163. When production exceeds sales, a portion of the _____________________ is deferred to

a future period as part of the cost of ending inventory under absorption costing, but not

under variable costing.

Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a164. When units produced exceed units sold, income under absorption costing is ___________

than income under variable costing.

Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

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a165. Management may be tempted to overproduce in a given period in order to increase net income if _______________ is used for internal decision making.

Ans: N/A, SO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Completion Statements

154. CVP 160. degree of operating leverage155. Margin of safety a161. absorption costing156. Sales mix a162. variable costing157. weighted-average unit contribution a163. fixed manufacturing overhead158. limited resources a164. higher159. Cost structure a165. absorption costing

SHORT-ANSWER ESSAY QUESTIONS

S-A E 166

A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users.

Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 166

Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs.

Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs.

S-A E 167

Jacob Andrews, president of Video Adventure, has heard about operating leverage and asks you to explain this term. What is operating leverage? How does a company increase its operating leverage?

Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 167

Operating leverage refers to the change in net income that a company experiences when there is a change in net sales revenue. Companies that have higher fixed costs relative to variable costs have higher operating leverage. In that case, the company’s profits will increase rapidly when sales revenue increases, but decrease rapidly when sales revenue decreases. A company can increase its operating leverage by increasing its reliance on fixed costs, with a corresponding decrease in variable costs.

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aS-A E 168

Define variable costing and absorption costing. What are some of the benefits to a manager from using variable costing instead of absorption costing for internal decision making?

Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Cost Management

aSolution 168

Variable costing is a system for determining product costs that is used primarily for making managerial decisions. This system determines product costs by considering only direct materials, direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by some managers and also for external reporting. Under absorption costing, product costs include direct materials, direct labor, and both fixed and variable manufacturing overhead costs.

Some of the benefits to a manager from using variable costing instead of absorption costing for internal decision-making include: variable costing already has to be used when constructing a contribution margin income statement, variable costing puts greater focus on cost behaviors, fixed expenses do not get tied up in inventory under variable costing, variable costing is better suited for cost-volume-profit analysis, variable costing produces income statements that are closer to net cash flows than absorption costing, and the method ties in with standard costing and flexible budgeting more effectively.

aS-A E 169

How do differences in production and sales levels affect income under absorption and variable costing?

Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

aSolution 169

If production equals sales in any given period, the net incomes under both absorption and variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ, because the direct cost expense under variable costing will be equal to the product cost component of fixed overhead under absorption costing.

If production exceeds sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold, whereas under variable costing, all fixed manufacturing overhead costs will be expensed.

If sales exceed production, absorption costing net income will be less than variable costing net income. Absorption costing net income is less because some fixed manufacturing overhead costs from the previous period will now be expensed when the older product is sold, whereas under variable costing, only fixed manufacturing overhead costs of the current period will be expensed.

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